Uncertainty of Client Importance and Information Asymmetry

This study investigates whether a firm's client importance and the associated uncertainty affect the firm's information asymmetry; this investigation is conducted at the audit firm and group levels by using Taiwan's market data from 2000 to 2010. Empirical results show that client importance to an audit group (hereafter, IMP_G) and the associated uncertainty (hereafter, IMP_G_V) are significantly and negatively related to information asymmetry, whereas client importance to an audit firm and the associated uncertainty are no significant when other established variables are controlled for. The results suggest that the assertion of the reputation concern is empirically supported at the audit group level. In addition, we observe that the effects of IMP_G and IMP_G_V on information asymmetry become weaker with increasing firm profitability, indicating that firms with higher profitability have fewer incentives to hide information about earnings, thereby weakening the importance of auditor independence. Finally, our results are robust for addressing endogeneity concerns.